Question

Explain how the producer’s ability to shift resources to alternative uses and time affect price elasticity of supply.

Answer 1

The price elasticity of supply is the measure of change in the quantity supplied to a given change in own price of the commodity. It measures how far supply expands with rise in price and contracts with the all in price. If the supply is more elastic a given increase in price cause proportionately larger increase in supply and a fall in price cause proportionately larger reduction in the quantity supplied. If the supply is inelastic a given increase or decrease in price does not produce considerable change in the quantity of supply.

An elastic supply reveals that the producer is able to increase the volume of output without a rise in cost and delay in time. An inelastic supply is the result of the inability of producers to increase the volume of output without delay and increased cost.

Usually when the price of a product increase its supply increase. The reason is that the producers shift resources from the production of one good the price of which falls to the production of another good for which the price increase This shifting of the factors depends upon the mobility of factors. If the factors are immobile between the industries, it is hard to increase the supply of a product when it price rise. Then the supply cannot increase with increase in price and the supply in such situation is less elastic. On the other hand if the factors are perfectly mobile it is easy for a producer to shift the resource from one industry to other. In such case the supply will be more elastic.

Again the elasticity of supply depends upon the cost of factors when they mobilized from industry to industry. If the resource are shifted from one to another the factor price increase. While cost increase along with the increased price, no benefit derives from increasing the supply. Thus the elasticity of supply depends upon the ability of the producers to mobilize resources without increasing their price. If cheap resources are available and they do not lack mobility it is easy for an employer to mobilize resources and produce extra output at a sufficiently low cost and the supply become more elastic.

The time period also influence the elasticity of supply. During longrun the time is enough for the producers to mobilize resource and start production. This is why supply is more elastic in longrun. But this ability of firms to expand output is limited in short period. It will take more time to construct new factories, install machines and employing labours and procuring resources. Thus in short the ability of the entrepreneurs to expand output in response to a price change is limited in shortrun. Therefore the shortrun supply is limited and inelastic.